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National Savings and Balanced Growth: China vs India
Yin ZhangNorthwest A&F University
Guanghua WanUNU-WIDER
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Background
• China– GDP annual growth 9.5%– 2nd largest in PPP term in 2004
• India– GDP annual growth 5.8%– 4th largest in PPP term in 2004
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PPP GDP Shares of Major Economies in 2004
China13% India
6%
USA21%
Euro Area15%
Japan7%
Rest of the World38%
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Contrasting Development Models
• China– Manufacturing-led– GDP shares: industry 46%, services 41% (2005
National Economic Census)– East Asian Model?
• India– Services-driven– GDP shares: industry 27%, services 52% – New growth paradigm? (leapfrog
industrialisation stage)
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25
30
35
40
45
50
55
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
China India
Share of industry in GDP
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25
30
35
40
45
50
55
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
China India
Share of services in GDP
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Why the difference?
• different saving rates– Currently, China saves nearly half of its GDP,
India saves 28%– Historically, saving rate was also much higher
in China
• Other forces at work, e.g.– China’s industrial policy– India’s over-regulated labour market
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Gross National Saving Rates
15
20
25
30
35
40
45
50
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
China India
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Imbalances: China• High savings curtails consumption
– Reliance on investment expansion increased growth volatility
– Diminishing returns misallocation of capital non-performing loans
– Excess capacity deflation
• Insufficient domestic absorption– Reliance on export expansion– Trade disputes incite protectionism in major
export markets
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Imbalances: India• Lack of investment funds led to neglect of
infrastructure– High production costs stunted manufacturing sector
will eventually constrain the growth of high-tech centres
• IT and IT-enabled services are skill-intensive, rather than labour-intensive– Jobless growth: rural unemployment and poverty
– Lack of progress in urbanisation
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Shares of public saving in total saving
-20
-10
0
10
20
30
40
50
60
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
China India
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Private savings have risen in both countries
0
5
10
15
20
25
30
35
40
45 % of GDP
China India
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Empirical Model
• Extended Life-cycle model– Current per capita GDP: Keynesian absolute income
hypothesis– income growth: adjustment lag or perfect foresight– rise in real interest rate has ambiguous effects on savings rate:
substitution vs. income effect– high dependency ratio lowers savings rate– Inflation: money illusion or wealth effect– Fiscal deficit: Ricardian equivalence– Inequality: propensity to save of the rich is higher– Financial depth: M2/GDP, Domestic credit/GDP
• DataNBS, CSO, RBI, IMF, WDI and WIID
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Determinants of private savings rate in China
Coefficient Standard Error Coefficient Standard ErrorGDP per capita 0.104 0.055 0.092 0.051GDP per capita growth 0.147 0.064 0.203 0.029DE1 -0.620 -0.135 -0.419 -0.105DE2 -0.009 -0.005 0.006 0.004Real interest rate -0.013 -0.016 -0.008 -0.008Inflation -0.189 -0.096 -0.165 -0.085Fiscal deficit 0.197 0.313 0.124 0.155Inequality 0.109 0.056 0.091 0.051Financial depth 0.157 0.087 0.103 0.129
OLS IV
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Determinants of private savings rate in India
Coefficient Standard Error Coefficient Standard ErrorGDP per capita 0.061 0.02 0.073 0.035GDP per capita growth 0.082 0.037 0.096 0.046DE1 -0.262 -0.131 -0.322 -0.115DE2 -0.009 -0.006 -0.011 -0.007Real interest rate -0.114 -0.054 -0.089 -0.048Inflation -0.056 -0.027 -0.106 -0.054Fiscal deficit -0.144 -0.085 -0.132 -0.088Inequality -0.311 -0.240 0.263 0.202Financial depth 0.020 0.011 0.012 0.006
OLS IV
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• Demographic shifts have powerful effects on the saving rates of both countries
• However, the effect of elder dependency ratio is still not discernible
• As demographic transition continues, what’s in store for saving rate?
Result I: Demography
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Demographic Dividend
0
5
10
15
20
25
30
35
40
45
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
0-14, China
0-14, India
over 65, China
over 65, India
% of total population
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Result II: Development & Growth
• Saving rate rises with income level
• Saving rate rises with higher growth
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Result III: Other• In both economies, inflation has a negative
effect on savings, probably because of heavy weight of financial wealth in private assets portfolio
• Increase in income inequality raises saving rate in China
• Financial development has positive effect on savings in India
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Policy Implications• The rise in saving rates in both countries are mainly
structural– can expect saving rates to increase further with
rising income and declining minors dependency ratio
• To balance growth in China– monetary instruments are ineffective (interest rate)
or undesirable (inflation)– fiscal policy promising (Ricardian equivalence
absent)– income redistribution
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Policy Implications
• To raise savings in India– Further development of financial saving instruments
– The negative relation between public dis-saving and private saving is puzzling. Yet if it represents a causal relationship, India shall surely rein in its fiscal deficit.
• For the world at large– Structural high savings in the two most vibrant
economic powerhouses are a boon to the world economy
– Downside risks are mainly short-run